Debentures – Meaning and Types

The finances raised through debentures are also known as long-term debt.

Meaning of Debentures

Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals and for payment of interest at a fixed rate payable either half-yearly or yearly.

Meaning of Bond

Bond is also an instrument of acknowledgement of debt. Bonds can be issued by Government, semi-government and non-governmental organizations.

Types of Debentures

1. Secured and Unsecured Debentures

Secured debentures (mortgage debentures) are such which create a charge on the assets of the company.

Unsecured debentures do not carry any charge or security on the assets of the company.

2. Redeemable and Irredeemable Debentures

Redeemable debentures are those which can be redeemed during the life time of the company i. e. after a specific period of time.

Irredeemable debentures are those which can be redeemed only in the event of the winding up of the company.

3. Registered and Bearer Debentures

Registered debentures are those which are duly recorded in the register of debenture holders maintained by the company and are transferred through an instrument of transfer.

Bearer debentures are the debentures which are transferable by mere delivery.

4. Convertible and Non-Convertible Debentures

Convertible debentures are those debentures that can be converted into equity shares/preference shares/new debentures after the expiry of a specified period.

Non-convertible debentures are those which cannot be converted into equity shares/preference shares/new debentures.

5. First and Second Debentures

Debentures that are repaid before other debentures are repaid are known as first debentures.

The second debentures are those which are paid after the first debentures have been paid back.

6. Zero Coupon and Specific rate debentures

Zero coupon debentures do not carry any certain rate of interest but is hidden as these are issued at discount and redeemable at par.

Debentures with specific rate carry a specified rate of interest mentioned with them.